This post and the next two will be talking about credit cards. This first one is about why you and Maddie should get a credit card NOW (even if you are under 18). There are five main reasons why you and Maddie need a credit card now, and we will look at each one to see why those reasons are so important, even when you are young.
Maddie is fully aware that credit cards are great tools to have in her personal finance tool belt. In fact, they are essential for you to begin your journey towards financial independence.
But before getting started, Maddie gave some thought to these important facts:
- Credit cards are NOT an extra source of income for Maddie. Credit cards don’t “give” her money. They are simply a way to “borrow” money that she will have to pay back later.
- If Maddie does not use credit cards responsibly, they will become a nightmare and could actually prevent Maddie from proceeding down her road to FI.
- Maddie can use a credit card to her advantage, even if she is not 18 yet. (so keep reading)
Credit card basics
Credit cards give Maddie the ability to borrow money from a financial institution. That institution will lend (not give) her money to pay for something. Maddie, in return, agrees to pay the money back.
If it takes Maddie longer than a month to pay back the money, she also agrees to pay them interest (extra money). The interest is the fee she pays the institution since they allowed her to borrow their money.
Freak Speak: Interest = Money paid by a borrower at a particular percentage rate for the use of money lent to the borrower.
“Credit card accounts are known as revolving debt because you can borrow money indefinitely, month after month, as long as you make the minimum monthly payments, which can include interest, and don’t exceed your credit limit.”
Freak Speak: Minimum monthly payment = the smallest amount that a credit card owner needs to pay each month; the amount depends on how much total money is owed to the credit card company. For example, if you owe the credit card company $500, your minimum payment might be $25. But if you DON’T pay all the money you owe every month, you will start to rack up hefty interest fees, which is NOT okay.
Freak Speak: Credit limit = the maximum amount of money you can owe at one time on an individual credit card; the limit of how much total debt you can have on a card at any one time.
5 Eye-Opening Reasons Maddie (and You) Need a Credit Card NOW
1. Electronic history
Maddie understands that a credit card creates an electronic history every time she uses it. This makes it much easier to track her expenses with a free app, which is one of the most important things she can do to manage her money like a Freak. See Post 15 and Post 16 for more info about how to track your expenses and why you should do it.
2. Security against misuse
If someone steals Maddie’s card or finds out her card information (think: identity theft), she is not responsible for the unauthorized charges as long as she reports it promptly to her credit card company.
Maddie realizes that credit cards can have rewards for using them, like cash-back or discounts on travel.
A credit card allows Maddie to make a purchase in case of an emergency when cash or mobile payment options usually won’t do the trick. If she is away from home, gets stranded late at night, and needs to get a hotel room or have someone tow her car, a credit card will come in very handy. A credit card can provide an instant solution to paying off many unexpected (or emergency) expenses because credit cards are so widely accepted.
5. Build her credit score (Most important reason)
Maddie knows that this is the most important reason for getting a credit card. Credit cards help build her credit history and, thus, her credit score. A solid credit score is critical in helping Maddie to attain loans in the future on things like a house, a rental property, or a car (although no one should EVER buy a car with a loan!).
Freak Speak: Credit history = a record of how responsible a person is when it comes to paying their bills on time.
Freak Speak: Credit score = a number ranging from 300-850 that depicts a consumer’s creditworthiness; the higher your credit score, the less risky you are to someone who might lend you money.
What about all the bad things I hear about credit cards?
Finally, Maddie recognizes that credit cards can be dangerous if not used intelligently. Luckily, to avoid any of the downfalls, Maddie only has to follow two rules:
Maddie’s Rule 1: ALWAYS pay her ENTIRE balance EVERY month by the due date. When Maddie gets her monthly credit card statement, she will pay the entire balance (total amount) listed on that statement. And she will pay it by the due date, which will also be listed on the statement.
Maddie’s Rule 2: NEVER spend more on her credit card each month than she can pay. In other words, Maddie won’t buy too much stuff with your credit card so that she cannot handle Rule 1 above. Maddie will plan ahead to make sure she will have enough to pay the ENTIRE balance.
The next post on the SheeksFreaks blog, Post #18, will walk you through how to get your first credit card, even if you are not 18 yet. Post #19 will explain how to manage that credit card once you have it.